August 22, 2012 8:59 pm
This article is provided to FT.com readers by PaRR (Policy and Regulatory Report)— a newly launched product of The Mergermarket Group providing proprietary intelligence and research on competition law and sector-specific regulatory changes around the world. www.parr-global.com
•Facebook requested special treatment from the California Department of Corporations to minimize public awareness of the hearing
•Approval of Facebook’s request to transfer stock to Instagram ‘not necessarily a done deal’
Facebook’s (NASDAQ:FB) attorneys sought to limit public participation in an upcoming California state government hearing on the fairness of Facebook’s plan to transfer stock to Instagram, according to documents obtained by PaRR.
The attorneys sought two exemptions from the standard “fairness hearing” procedures that are designed to provide members of the public with easy access to the 29 August hearing.
First, Facebook asked the California Department of Corporations (the Department) not to offer a toll-free telephone number for remote attendees; instead callers would have had to use a paid telephone line.
Citing the “high-profile nature of the transaction,” Gregory Rousell, an attorney at Fenwick & West, suggested in a letter dated 31 July that a paid line would be in the shared interest of Facebook, Instagram, and the Department, according to the documents.
Requiring phone attendance at a cost to the caller would allow the hearing “to be conducted with minimal interruption from disinterested parties who might decide to attend the hearing telephonically and ask questions unrelated to the acquisition contemplated by the Merger Agreement,” Rousell argued, according to the documents.
The Department appears not to have granted this exemption.
However, the Department did grant a separate request, in which Facebook sought an exemption from the requirement to provide notice of the public hearing through a newspaper of general circulation in San Francisco County.
On 14 August, Evan Johnson, an associate at Fenwick & West, wrote to the Department: “We just received the attached letter from you. It states that we should publish a notice of hearing in a newspaper but I know we discussed on the phone that this requirement would not be necessary. Please let me know if we should proceed with a newspaper publication after all.”
Less than 30 minutes later, an attorney at the Department replied: “Please disregard that instruction, it should have been omitted.”
Rafael Lirag, an attorney at the Department, will preside over the 29 August hearing and determine whether Facebook can transfer stock to Instagram, according to the documents.
Approval of Facebook’s application is “not necessarily a done deal,” a former Department commissioner interviewed for this report warned, saying the Department could require Facebook to make changes to the permit application or restructure the deal itself.
“Several things can happen along the way,” the former commissioner said.
The valuations of Instagram and Facebook are expected to be a major topic at the hearing. The former commissioner predicted that Lirag will likely look at changes in the relative values of Facebook and Instagram, as well as the exchange ratio in the proposed deal. The exchange ratio is the number of shares swapped in a merger deal. “I expect that both sides will put on valuation testimony,” the former commissioner said.
Based on Facebook’s approximate current price of USD 20 per share, Instagram shareholders would receive roughly USD 760m in the deal, with USD 300m of the total in cash and the remainder in Facebook stock. This valuation represents a slide of nearly 40% since Facebook’s IPO price of USD 38, which would have put the deal at a cash-and-stock total of nearly USD 1.2bn.
Mark Leyes, a spokesperson for the Department, confirmed the former commissioner’s comment that approval of the permit to issue stock could depend on the inclusion, removal, and/or amendment of certain deal terms.
Notably, Leyes said that even if the permit is granted, “there may be other requirements that need to be satisfied” before the stock transfer takes place. Federal Trade Commission (FTC) clearance and shareholder approval may be necessary, Leyes explained.
The former Department commissioner pointed out that a move by Facebook to jump the gun and transfer Facebook shares prior to FTC clearance would be risky, if not forbidden.
An FTC official told PaRR, “There isn’t any specific rule addressing this issue [at the FTC], and whether it amounts to gun-jumping will depend on the facts of the particular situation.”
Attorneys for Facebook and Instagram did not respond to requests for comment. Despite repeated attempts, neither Facebook, Instagram, nor any Instagram shareholder would comment for this article.
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